Weekly economic briefing: Wages growth still stuck in the slow lane

The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

Australian economic briefing by David Rumbens

This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.

Wages growth still stuck in the slow lane

Through the ups and downs of the mining boom, the iron ore price was the most closely watched indicator for the Australian economy. Now, the data on wage growth has arguably taken that mantle. Wage growth in Australia – as in most advanced economies – has been very low for some time.

Low wage growth is a perplexing problem for the Reserve Bank of Australia (which wants inflation to pick back up to its 2–3% target) and the Federal Government (which wants income tax revenue to pick up to help it achieve a budget surplus by 2020-21) – not to mention workers themselves.

In Australia, the most closely watched measure of wages growth is the Wage Price Index, or WPI. As the Chart below shows, the latest data on WPI growth are far from impressive – and at first glance these figures suggest little reason to believe that wages growth will pick up strongly enough to match the Federal Budget’s outlook for the coming year. Over the year to March 2018, the WPI rose just 2.1%, only marginally above the record low rates of increase recorded last year. Private-sector WPI growth is even weaker, at just 1.9%.

Source: Department of Jobs and Small Business, Australian Bureau of Statistics

The continuing, and accelerating, decline in the rates of wage increases included in Enterprise Bargaining Agreements (EBAs) is an interesting dimension. EBAs cover around 15% of the Australian workforce. Since new agreements will run for around three years, the latest EBA outcomes imply a solid brake on upward movements in wages in the medium term. Yet EBAs are only part of the wages story, and are not always a useful guide: wage growth in construction industry EBAs have been rising more rapidly than in any other sector, yet wage growth in the broader construction sector is currently below the national average. (That suggests construction EBA wage outcomes are out of line with broader economic and EBA trends).

Digging a little deeper may provide a slightly more positive outlook. While the headline WPI has only risen by 2.1% over the past year, there has been a much stronger result when bonus payments are included. This measure has jumped to 2.7% over the past twelve months to its strongest result since 2014. This result is consistent with anecdotes that employers are trying to avoid locking in permanent wage increases, preferring to use one-off payments to maintain flexibility in their cost base over time.

So why is wages growth generally still slow? Low productivity growth is one possible reason. Another is that there is still a fair bit of ‘slack’ in the labour market, meaning that employers aren’t feeling the need to bid up wages to get the workers they need. The unemployment rate, at around 5½%, suggests that there is still a reasonable pool of would-be workers without jobs. The underutilisation rate – which includes not just the unemployed but also casual and part-time workers who would like to work more hours – has until recently been stuck at very high levels. That appears to be a key reason for ongoing weak wages growth (Chart 2).

Chart 2: Wages growth – Wage price index and utilisation rates

Source: Department of Jobs and Small Business, Australian Bureau of Statistics

The latest improvements in the underutilisation rate are promising. But recent international experience suggests that it will take a significant improvement to kick-start wages growth back up. Wages growth in the United States has been picking up for a while (although it’s still low), and recently there are more positive signs in Germany and Japan: but in all those cases, their unemployment rates fell to extremely low levels before a pickup in wage growth began to occur. Australia’s labour market is not nearly so tight at the moment. And most forecasters, including ourselves, expect the unemployment rate to fall only gradually.

UK economic briefing by Ian Stewart

In the last decade Britain and the US have experienced an unusual combination of soaring asset prices and sluggish wage growth.

Between 2006 and 2016, the total value of assets held by UK households rose by 59% while average incomes increased by just 24%.

In the UK roughly 40% of household wealth is held in pensions, 40% in property, 10% in other financial assets such as ISAs and 10% in physical assets. The median UK household, the one in the middle of the wealth distribution, is asset rich. Such a household owns net assets, after liabilities such as mortgages and credit card debt, of £259,000.

In the UK, as in other Western nations, wealth is spread unevenly. The wealthiest 10% of households own 44% of all wealth. The least wealthy 50% of households own 9% of total wealth.

The divide between holders of assets and those without assets has widened, especially in relation to housing. According to the Resolution Foundation it takes about 20 years for low and middle income households to save for a deposit for a house, up from just three years in 1997.

Perhaps it’s no surprise that all of this has stoked interest in the distribution of wealth. In the last ten years Google searches for “wealth inequality” have been running at about twice the rate they were in the decade until 2007.

Some argue that the appropriate response to rising wealth inequality is to tax wealth and capital more heavily.

Earlier this year Rachel Reeves, a senior Labour MP and Chair of the Commons business select committee, called for an additional £20bn a year in wealth taxes. Labour’s new leader in Scotland, Richard Leonard, has called for a one-off wealth tax and heavier taxation of more valuable housing and land. In February Labour’s Shadow Chancellor, John McDonnell, said his party was considering taxing land values to boost local authority spending. Earlier this month the Resolution Foundation proposed replacing inheritance tax with a tax on gifts paid by recipients which would, in time, yield more than twice as much revenue as the current system.

Yet in recent decades the tide has gone in the opposite direction. The arguments against taxes on wealth and capital – that they are unfair, deter enterprise and saving, “lock in” wealth and boost tax evasion – have tended to prevail.

The number of developed countries with an annual wealth tax has shrunk from 12 in 1994 to just four – Spain, Norway, Switzerland and France. (Last year President Macron slashed the burden of France’s wealth tax by restricting it to property). In OECD countries the proportion of total government revenues raised by such taxes has fallen by 60% since the 1960s.

In the UK, inheritance tax (IHT) is especially unpopular. The public consider it to be the most unfair of the major taxes, with only 22% of those polled seeing it as “fair”. Perhaps surprisingly, opposition to inheritance and estate taxes is even stronger among lower than high earners. Such sentiment helps explain the sharp decline in the burden of IHT over the years. Yields from estate and gift duties have fallen from 2.6% of all revenues in 1965 to less than 1% today, leading some to dub it the “voluntary tax”.

Nor, for all the recent focus on inequality and fairness, do voters necessarily respond to redistributive policies in the way that might be expected.

Last year Conservative plans for elderly people to fund care costs from the value of their home played badly with voters, despite the fact that wealthier individuals would have paid more. Conversely Jeremy Corbyn’s suggestion that student fees might be scrapped was thought to be a vote winner, even though it would benefit high earners the most. (High-earning graduates repay the largest share of their student loans so they benefit most from the removal of tuition fees).

In the 1970s Britain’s Labour Party flirted with a wealth tax and the idea has recently been getting more air time. And yet Labour’s 2017 manifesto, widely seen as its most left wing since 1983, did not advocate a wealth tax – perhaps partly because of the political risks of doing so.

There are, of course, other lower profile ways of taxing wealth and capital, such as through Stamp Duty and reducing tax reliefs for pensions, other forms of saving and on capital gains. Bands for council tax could be changed to increase levies on higher value properties. Reliefs for inheritance tax could be made less generous. (A wide ranging Treasury consultation on IHT is currently underway).

My guess is that people tend to be less concerned about wealth or income inequality than they are about whether their own incomes are rising. If this is the case the real problem of the last ten years has not been rising wealth inequality but stagnating real incomes. Raising spending power, especially for those on middle and lower earnings, is the great challenge. But until that happens, concerns about inequality are likely to loom large.

PS: There’s a perception that robots and technology have destroyed work in the manufacturing sector. It certainly holds in the rich world, where according to Professor Adrian Wood at the University of Oxford, around 50 million manufacturing jobs have been lost since 1985. But Professor Wood’s work suggests that these losses have been eclipsed by an estimated 100 million increase in the number of jobs in manufacturing in emerging market economies. Technology and globalisation seem to have redistributed manufacturing employment within the world economy but also added to the overall number of such jobs.

OUR REVIEW OF LAST WEEK’S NEWS

The FTSE 100 ended the week up 0.7% at 7,779.

International economic briefing by Ian Stewart

Economics and business

UK wages rose by 2.9% year-on-year in the first quarter, while employment rose by 197,000 over the quarter, the biggest jump since 2015

The US delayed its plans to impose tariffs on up to $150bn of Chinese imports after China promised to “significantly increase” its purchases of American farm exports and energy

The US 10-year treasury yield rose to 3.1%, its highest level since 2011, after a flurry of positive economic data raised interest rate expectations

Japan’s economy contracted by 0.6% on an annualised basis in the first quarter of 2018, breaking eight quarters of consecutive growth

German GDP growth slowed sharply to 0.3% quarter-on-quarter in the first three months of the year, down from 0.6% in the fourth quarter of 2017

Euro area inflation fell slightly to 1.2% in April, still well below the European Central Bank’s target of 2%

Ratings agency Moody’s warned that emerging economies with short-term debt and fiscal constraints are particularly vulnerable to a tightening in global credit conditions

The Turkish lira sunk to a record low against the dollar as Moody’s raised concerns over risks to the country’s banks

The oil price climbed above $80 a barrel, the highest level in nearly four years as energy giant Total said it would withdraw from Iran unless it receives a waiver from President Trump’s sanctions on the country

Rail services on the UK’s East Coast mainline will be brought back under public control after the private consortium holding the contract sustained heavy losses

UK’s children goods retailer Mothercare is to shut 50 stores as part of a restructuring deal struck with its creditors

The UK has slashed the maximum stake on fixed-odds betting machines from £100 to £2 with Culture Secretary, Matt Hancock, calling them a “social blight”

Apprenticeships in England fell 25% year-on-year in the six months to February despite the introduction of the UK levy. One explanation is higher cost of hiring including pension obligations and the National Minimum Wage

The US birth rate fell to a 30-year low in 2017, according to the Centers for Disease Control and Prevention

Brexit and European politics

Italy’s anti-establishment Five Star Movement and the far-right Northern League agreed a deal to form a coalition government

The two Italian parties said they wanted to return to a “pre-Maastricht era”

France and Germany said they will continue to negotiate on strengthening the euro area despite the emergence of the Eurosceptic Italian coalition

The Telegraph reports that new proposals endorsed by the UK Brexit Cabinet will concede that the UK will remain in the EU’s customs union until a solution to avoiding an Irish border is agreed

The UK’s leading manufacturing trade body EEF said that introducing a high-technology, frictionless border by the end of the Brexit transition was “unrealistic”

The UK’s visa cap prevented 6,000 key workers, including scientists and engineers, from outside the EU coming to the UK in the four-month period to March

And finally…

The Mayor of Rome, Virginia Raggi, has encouraged the city council to look into the possibility of putting sheep in the capital’s public parks and gardens to graze on the overgrown lawns – sheepskate solution

She also suggested that “cow could be deployed when the grass is particularly high” – lawn moo-er

David Rumbens is a Partner within Deloitte Access Economics. He is a macroeconomist with extensive experience in applied economic and quantitative analysis of the Australian economy, along with considerable experience in labour market analysis.

Ian Stewart is a Partner and Chief Economist at Deloitte where he advises Boards and companies on macroeconomics. Ian devised the Deloitte Survey of Chief Financial Officers and writes a popular weekly economics blog, the Monday Briefing. His previous roles include Chief Economist for Europe at M...

James is one of Australia’s leading demographic modellers. He has extensive experience in determining the methodologies required for modelling, and has developed detailed models to the requirements of numerous clients.
James is the author of the quarterly publication Employment Forecasts.

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